Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions

ABSTRACT

We test the proposition that corporate control considerations motivate the means of investment financing—cash (and debt) or
stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock
which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate
acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing.
Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions
made by firms with low managerial ownership.